Concerns that the recovery in US auto demand is overly dependent on unsustainable credit expansion have been around for some time, but are enjoying new popularity in the wake of Department of Justice subpoenas of GM Financial and Santander. In response to the rash of headlines and commentary on “the subprime auto bubble,” Fed analysts and auto credit firms are moving to tamp down fears that auto lending is the latest Wall Street timebomb.

Four analysts at the NY Fed’s Liberty Street Economics blog linked to a provocative NY Times investigation into subprime auto lending, asking “what has all the fuss been about?” The analysts argue that although subprime auto lending growth has been substantial that “growth has been most pronounced among the riskier groups, which also experienced the most severe contraction during the credit crunch of 2007-09.”” They conclude: “the increase in prime auto lending over the same period makes the relative increase in the subprime share less pronounced.”

There has been a great deal of attention recently on the topic of auto lending, with a particular focus on “subprime lending.” The tone of many of the articles on subprime lending is negative. Many are chastising lenders and investors for “subprime shenanigans,” suggesting that, similar to the mortgage issues that precipitated the financial crisis, there is a bubble being created that is ready to burst. Others criticize the often high interest rates that borrowers with subprime credit must pay to obtain financing and feel that the practice is unfair and that rates should be capped.

Surprisingly little data has been shared in the press. Many of the arguments have been rhetorical, based on the following premise: Subprime lending caused the financial crisis, ergo subprime lending is dangerous. This generalization, however, does not always account for actual subprime loan data.

This is an easy argument to make; clearly subprime lending is not intrinsically bad, nor does it inevitably lead to a repeat of the 2008 mortgage meltdown. But the way Equifax characterizes the argument against subprime lending smacks of strawman. Attacking the most simplistic critiques of subprime lending is a good way to avoid the real problems, and Equifax joins the Liberty Street bloggers in focusing far too narrowly on the problem. The key to auto credit expansion has not been simply that subprime has grown, but that leases and term length has grown as well. As I noted at Bloomberg View recently, the auto market has to be looked at as a whole:

With half of new car sales supported either by leases or subprime credit, and ballooning loan terms leaving an increasing number of new car buyers underwater on their trade-ins, it’s clear that auto demand is hardly at a sustainable, organic level.

The question to ask is not “are an economy-wrecking number of car loans about to go bad?” but rather “how sustainable can auto demand be under these conditions?” What the more far-sighted auto executives, like Honda’s John Mendel, understand is that the negative effects of over-reliance on credit will hurt automakers themselves the most. Mendel tells Automotive News that a suite of unsustainable tactics are being used and that Honda wants no part:

“It’s a very, very short-term tactic, especially in the subprime area, because you not only are pulling sales forward, you’re probably pulling people out of used cars into a new car that maybe they can’t afford…. In addition to a heavy reliance on fleet sales to boost volumes, we are seeing some of our competitors adopt short-term tactics to stoke sales, like big jumps in subprime lending and 72-month terms. We have no desire to go there.”

Mendel’s warning echoes the Liberty Street bloggers, who point out that auto “captive lenders” have been responsible for most subprime auto lending both before and after the financial crisis.

“in the recovery, subprime lending by auto finance companies has shown considerable strength: since the trough, auto finance company lending to each of the three lowest credit score groups has more than doubled. In contrast… banks’ lending to subprime borrowers has historically been lower than that to prime borrowers, and despite the increase in recent subprime originations, the share of subprime borrowers remains small.”

Automakers are in the subprime lending business because they have deep incentives to maximize sales volume at almost all costs. And yet, as Mendel points out, using subprime or leasing or 72-month loans to expand demand typically just pulls it forward from the future… or worse. The reality is that vehicle registrations per licensed driver and Vehicle Miles Traveled peaked in 2006 and have been in decline ever since. In short, the United States is increasingly a mature market for cars, meaning there is an ultimate limit on credit-fueled expansion. When that limit is reached, either because consumers must slow new car purchases due to long loan terms or because Wall Street loses its taste for securitized auto loans due to Fed policy changes, demand for new cars could face serious –and extended– downward pressure.